Thursday 17 April 2003 05.57 EDT
First published on Thursday 17 April 2003 05.57 EDT

Until this week, if you asked someone in the music industry about Apple, they'd think of the Beatles' record label.

That was before news broke of the computer company's long-running talks to buy Universal Music Group - the name behind a host of the world's biggest recording artists, including U2 and Shania Twain - for between $5 and $6 billion.

Discussions between Apple and Vivendi, the French conglomerate that owns Universal, have gone on for several months, according to a report in the Los Angeles Times.

Neither company would comment, and Apple is now attempting to damp down the speculation. But it is understood that investment bank Morgan Stanley looked through Universal's books on Apple's behalf, with a view to a bid being tabled before Vivendi's next board meeting at the end of April.

Were the purchase to go ahead, Apple would acquire the world's biggest music label - and take a big gamble on the future of online music.

Apple has long had an interest in music, although never before on this scale. Its iTunes music-playing software has been shipped with every new Mac since January 2001. Later that year, the company launched its iPod music player, which allows users to carry around hundreds of hours of music "ripped" from CDs.

Now Apple is planning its own music download service, which will sell music over the internet to users of iTunes and the iPod - possibly on both PC and Mac platforms. It is thought the potential for Apple to buy Universal was first spotted during talks between Apple and Vivendi over music rights for this service.

According to sources quoted by the LA Times, Vivendi approached Apple chief executive Steve Jobs in December, proposing that Apple buy a stake worth around $1.5bn in the label. By last month, Jobs was considering purchasing the entire division.

But, despite the fact no formal bid has been made, grave reservations are being expressed by analysts, some of whom compare it to the ill-fated merger between AOL and Time Warner. Apple's shares lost around 8% on Friday, prompting more suggestions that Jobs had got cold feet.

Why are investors - and the company itself - so cautious? First, there are concerns that Apple could splash most, if not all, of its $4bn cash pile on the acquisition. Some onlookers worry that the company needs this financial cushion: Apple recently filed its first back-to-back losses since 1997, and has struggled to stop its share of the personal computer market sliding below 3%.

But there are also concerns about what state the music business is in today - and what kind of business downloadable music might become.

Record companies claim that music piracy, fuelled by online sharing of MP3 music files, has sliced off a quarter of their revenues since 2000. Figures released last week by the London-based International Federation of the Phonographic Industry made glum reading: a fall of 7% in value, and 8% in unit sales. This is blamed on mass downloading from the internet and a "massive proliferation" of illegal CD-copying.

Sales in the net-savvy UK have remained stable in the past year, however, and some observers argue that falls in sales could be better attributed to the state of the world economy, and a dearth of new pop music talent. Either way, the music industry is in difficulty, with Apple's apparent target taking its share of the hit: profits at Universal fell 23% last year.

What might be Apple's plan? Universal's roster of talent could form a strong backbone for the new downloadable music service. Apple knows it will have to offer an impressive service to beat the illegal, but free, online trade of music.

But Jobs is said to be convinced that a combination of technology - mainly improved digital rights management - and the kind of legal tussles that closed Napster could clear the way for legitimate, revenue-generating alternatives - including Apple's new music download service.

Were it to take the plunge and buy Universal, Apple would certainly be acquiring an enviable depth of content, with some of today's biggest names, and a huge back catalogue.

But it would still be an immense gamble. There has not been any serious attempt to gauge the value of the market for online music, and the company could discover that, after years of getting music free, internet users are unwilling to pay.

Any move by Apple could also harm its attempt to build a successful online music platform. The company already has agreement from four of the five big music labels to offer their acts on its service: it is hard to imagine receiving such backing if Apple suddenly became a competitor.

These concerns could be what has cooled Jobs', and Apple's, interest.

Even if it did go ahead, there is one battle Apple might have overlooked: one with the original Apple, the Apple behind the Beatles. In 1990, Apple Corps extracted a promise from the computer company that it would never enter the music business, to avoid a clash with its trademark. Assuming that this restriction is still in place, snapping up the world's biggest record label might just spark a few complaints from the representatives of the fab four.